Legal & Regulatory
NGO Regulations May Tighten Further
According to local media, the Prime Minister’s Office has instructed the Ministry of Home Affairs (MHA) to tighten regulations on non-governmental organizations (NGOs. The reports state that the MHA has been asked to amend aspects of the Foreign Contributions Regulation Act (FCRA) to ensure that NGOs report foreign financing within 48 hours of receipt. The reports also claim that the MHA is exploring different ways to audit NGOs and make their financial information public. If enacted, these reforms would significantly increase the compliance requirements of foreign financed NGOs
I-T Expanding Tax Collection Efforts in Tier-II Cities
The Income Tax Department plans to expand its tax collection activities in Tier II cities, such as Jaipur in Rajasthan state, Indore in Madhya Pradesh state and Vishakhapatnam in Andhra Pradesh state. The initiative follows a directive from the federal government to increase the number of taxpayers in the country by 2.5 million individuals and entities every month.
The Central Board of Direct Taxes (CBDT), the Income Tax Department’s administrative and policymaking body, found that the gap between the actual number of taxpayers and potential number of taxpayers was widest in the country’s rapidly growing Tier-II cities. Income Tax and CBDT officials quoted in the media report that authorities will not use adversarial or intrusive measures to expand tax collection.
New Service Tax Rate Effective June 1
The Central Board of Direct Taxes (CBDT) confirmed that the new 14 percent service tax rate will take effect on June 1, replacing the current 12.36 percent rate. Although the new service tax rate was recently passed in the in the Finance Act, 2015, the CBDT had not confirmed its implementation date until last week. Business affected by service tax should make plans to accommodate the new rate from June 1. Finance Minister Arun Jaitley first announced the new service tax rate in India’s budget for FY 2015-16; authorities expect the new rate to ease the transition to the new Goods and Services Tax (GST) that will take effect in April 2016.
FDI Cap for B2C E-commerce to Remain
Last week, Commerce Minister Nirmala Sitharaman met with public and private sector representatives to discuss foreign direct investment (FDI) for e-commerce in India. Local observers in the media speculated that the discussion might lead the government to raise, or even lift, the FDI cap on business-to-consumer (B2C) e-commerce. However, domestic e-tailers predictably voiced their opposition to any such reform, and while the discussion did not produce any concrete outcomes, the government has long sought to protect India’s booming B2C e-commerce industry from foreign competition.
Although the government allows 100 percent FDI in business-to-business (B2B) e-commerce, it does not allow any FDI in B2C e-commerce. Many foreign e-commerce companies, such as Amazon and Alibaba, have shifted from an ‘inventory model’ to a ‘marketplace model’ to sidestep this FDI cap and access the Indian market. However, the marketplace model is cost prohibitive for many small and medium sized e-tailers based abroad. While many government officials and domestic e-tailers remain opposed to reforming the B2C FDI cap, domestic industry groups, foreign retailers, and some foreign governments have encouraged the Indian government to lift the cap.
Government Crackdown on Foreign Funded NGOs
The Ministry of Home Affairs (MHA) recently revoked the licenses of nearly 9,000 non-governmental organizations (NGOs). The MHA revoked the licenses for non-compliance with Section 18 of the Foreign Contributions Regulation Act (FCRA), which stipulates that NGOs must declare financial contributions from abroad to the central government.
Validity of Defense Industrial License Increased
The government extended the validity of industrial licenses for the defense industry from three to seven years. Further, defense companies can now extend the license for three additional years after the initial period. Industrial licenses are currently required to make items such as armored fighting vehicles, defense aircraft, warships, as well as arms and ammunition. Items that have both military and civilian applications do not require a defense-related industrial license.
The reform means that defense companies now effectively have ten years to begin manufacturing in India – a significant development given the long gestation period for large defense contracts. Department of Industrial Policy and Promotion officials report that the reform is designed to allow companies to focus on manufacturing, not compliance.
India is one of the largest defense importers in the world. The government has subsequently sought to protect and encourage domestic defense manufacturers. The foreign direct investment limit in defense stands at 49 percent, while laws permit foreign portfolio investments of up to 24 percent under the automatic route. Despite this, domestic firms have struggled to develop the capabilities needed to sate India’s defense requirements – the defense ministry recently reported that Indian companies have been unable to fulfill approximately US$ 15 billion in government tenders issued since 2013.
Legacy Tax Issues Set for New Committee
Finance Minister Arun Jaitley has said that the government will set up a high-level committee to review tax issues. The proposed committee is expected to try to contain the fallout from the Minimum Alternate Tax (MAT) levy on foreign portfolio investors, as well as related court disputes with Vodafone, Nokia and Cairn Energy. In a recent media interview, Jaitley stated that the decision to implement the MAT tax was taken not by the government, but by quasi-judicial bodies created before the government came to power.
Although these issues do not often affect small and medium sized businesses, the MAT controversy, along with other high profile tax disputes, has led many foreign investors to question the business friendly image Narendra Modi’s government has presented. If the proposed committee is created, it will only consider legacy tax cases – tax demands arising from actions that authorities took before the current government came to power. However, Jaitley has ruled out retrospective amendments to tax laws for the benefit of investors, which means that any such changes will have to come in the interpretation of current laws.
India’s First Medical Devices Park Set for Gujarat
The federal government announced plans to set up India’s first industrial park for manufacturing medical devices in Gujarat, Prime Minister Narendra Modi’s home state. The Gujarat state government has earmarked land in Sanand, an automobile manufacturing hub, for medical device manufacturers. The National Institute of Pharmaceutical Education and Research (NIPER), which is based in Ahmedabad, Gujarat, will oversee research and development for the project.
The federal government recently opened the medical device industry up to 100 percent foreign direct investment (FDI). Currently, 71 percent of India’s medical devices and 87 percent of high-end medical devices, including medical electronics and surgical equipment, are imported. However, experts expect this dynamic to change following the FDI reform, and the government’s announcement of plans to provide other infrastructural and financial incentives for the industry.
The creation of the park followed a recommendation from a federal government task force, which was setup earlier this year by the Department of Pharmaceuticals to promote the Make in India campaign. Other recommendations of the task force include enhancing policy and institutional support, strengthening infrastructure and providing tax breaks for the industry. The federal government’s commitment to the industrial park in Gujarat indicates that it will likely follow through on other task force recommendations; government officials report that tax incentives for domestic manufacturers will be unveiled in a phased manner.